Health entitlements threaten US long-term growth

Here’s the scary news:

“In Decem­ber 2007, the Con­gres­sion­al Bud­get Office (CBO) pub­lished The Long- Term Bud­get Out­look, which pre­sent­ed a long-term pro­jec­tion of the bud­get under an ‘alter­na­tive fis­cal sce­nario,’? rep­re­sent­ing one inter­pre­ta­tion of what con­tin­u­ing today’s under­ly­ing fis­cal pol­i­cy would mean. CBO pro­ject­ed that, under that sce­nario, spend­ing on Medicare, Med­ic­aid, and Social Secu­ri­ty would rise rapid­ly, and fed­er­al out­lays exclud­ing inter­est (pri­ma­ry spend­ing) would climb from about 18 per- cent of GDP in 2007 to 28 per­cent in 2050 and to 35 per­cent in 2082… Because the sce­nario also assumes that rev­enues as a share of GDP would not increase much over the 75-year peri­od, CBO pro­ject­ed that the fed­er­al bud­get deficit and fed­er­al debt held by the pub­lic would rise sharply. By CBO’s reck­on­ing, fed­er­al debt under that sce­nario would climb from about 37 per­cent of GDP in fis­cal year 2007 to more than 290 per­cent in 2050—a large fig­ure by any stan­dard. Since the found­ing of the Unit­ed States, fed­er­al debt sur­passed 100 per­cent of GDP only for a brief peri­od dur­ing and just after World War II…”

The rem­e­dy? Tax rate hikes alone are infea­si­ble:

“…tax rates would have to be raised by sub­stan­tial amounts to finance the lev­el of spend­ing pro­ject­ed for 2082 under CBO’s alter­na­tive fis­cal sce­nario. With no eco­nom­ic feed­backs tak­en into account and under an assump­tion that rais­ing mar­gin­al tax rates was the only mech­a­nism used to bal­ance the bud­get, tax rates would have to more than dou­ble.”

So some mix­ture of tax increas­es and reduc­tions in health care enti­tle­ments will be nec­es­sary to avoid a seri­ous blow to eco­nom­ic growth.

Because Con­gress holds the key to long-term fis­cal bal­ances in the USA, set­ting tax rates and enti­tle­ments, they will be respon­si­ble for pass­ing the laws need­ed to avoid the prob­lems. But more than half of the Mem­bers of Con­gress must stand for elec­tion every two years: they seem to have more incen­tive for short-term man­age­ment of the bud­get than any oth­er pop­u­lar assem­bly on earth. They could not agree to deal with a dete­ri­o­rat­ing fund­ing out­look the Social Secu­ri­ty sys­tem in 2005–6. So what is the out­look for the more press­ing health care deficit?

I found the ref­er­ence to the CBO pro­jec­tions on Greg Mankiw’s blog.

Peter Gallagher

Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.

He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher